The rules applicable to a trust required to distribute all of its income currently to its beneficiaries may be illustrated by the following example:
(a) Under the terms of a simple trust all of the income is to be distributed equally to beneficiaries A and B and capital gains are to be allocated to corpus. The trust and both beneficiaries file returns on the calendar year basis. No provision is made in the governing instrument with respect to depreciation. During the taxable year 1955, the trust had the following items of income and expense:
| Rents | $25,000 | |
| Dividends of domestic corporations | 50,000 | |
| Tax-exempt interest on municipal bonds | 25,000 | |
| Long-term capital gains | 15,000 | |
| Taxes and expenses directly attributable to rents | 5,000 | |
| Trustee's commissions allocable to income account | 2,600 | |
| Trustee's commissions allocable to principal account | 1,300 | |
| Depreciation | 5,000 | |
(b) The income of the trust for fiduciary accounting purposes is $92,400, computed as follows:
| Rents | $25,000 | |
| Dividends | 50,000 | |
| Tax-exempt interest | 25,000 | |
| Total | 100,000 | |
| Deductions: | ||
| Expenses directly attributable to rental income | $5,000 | |
| Trustee's commissions allocable to income account | 2,600 | |
| 7,600 | ||
| Income computed under section 643(b) | 92,400 | |
(c) The distributable net income of the trust computed under section 643(a) is $91,100, determined as follows (cents are disregarded in the computation):
| Rents | $25,000 | |
| Dividends | 50,000 | |
| Tax-exempt interest | $25,000 | |
| Less: Expenses allocable thereto (25,000/100,000 × $3,900) | 975 | |
| ———— | 24,025 | |
| Total | 99,025 | |
| Deductions: | ||
| Expenses directly attributable to rental income | $5,000 | |
| Trustee's commissions ($3,900 less $975 allocable to tax-exempt interest) | 2,925 | |
| ———— | 7,925 | |
| Distributable net income | 91,100 | |
(d) The deduction allowable to the trust under section 651(a) for distributions to the beneficiaries is $67,025, computed as follows:
| Distributable net income computed under section 643(a) (see paragraph (c)) | $91,100 | |
| Less: | ||
| Tax-exempt interest as adjusted | $24,025 | |
| Dividend exclusion | 50 | |
| ———— | 24,075 | |
| Distributable net income as determined under section 651(b) | 67,025 | |
(e) The taxable income of the trust is $7,200 computed as follows:
| Rents | $25,000 | |
| Dividends ($50,000 less $50 exclusion) | 49,950 | |
| Long-term capital gains | 15,000 | |
| Gross income | 89,950 | |
| Deductions: | ||
| Rental expenses | $5,000 | |
| Trustee's commissions | 2,925 | |
| Capital gain deduction | 7,500 | |
| Distributions to beneficiaries | 67,025 | |
| Personal exemption | 300 | |
| ———— | 82,750 | |
| Taxable income | 7,200 | |
(f) In determining the character of the amounts includible in the gross income of A and B, it is assumed that the trustee elects to allocate to rents the expenses not directly attributable to a specific item of income other than the portion ($975) of such expenses allocated to tax-exempt interest. The allocation of expenses among the items of income is shown below:
| Rents | Dividends | Tax-exempt interest | Total | |
|---|---|---|---|---|
| Income for trust accounting purposes | $25,000 | $50,000 | $25,000 | $100,000 |
| Less: | ||||
| Rental expenses | 5,000 | 5,000 | ||
| Trustee's commissions | 2,925 | 975 | 3,900 | |
| Total deductions | 7,925 | 0 | 975 | 8,900 |
| Character of amounts in the hands of the beneficiaries | 17,075 | 50,000 | 24,025 | 1 91,100 |
1 Distributable net income.
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